Division 4 of Part VI of the Insolvency Act (Chapter 253) governs how a debt becomes a claim in the estate.
Section 110 — debts provable in insolvency
All debts and liabilities, present or future, certain or contingent, to which the insolvent (a) is subject at the date of the order of adjudication, or (b) becomes subject during the insolvency by reason of an obligation incurred before that date, are provable.
(2) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract or promise are not provable. A claim in tort — for negligence, for trespass, for defamation — is outside the insolvency altogether. Contractual damages, however unliquidated, are provable.
(3) A person who has notice of an act of insolvency available for adjudication shall not prove for a debt or liability contracted by the insolvent after the date of having that notice. Extend credit knowing of an act of insolvency, and you cannot claim in the estate. Notice runs through this Act as it does through section 80.
Contrast the corporate position: under section 351 of the Companies Act, a liability for damages is admissible without distinguishing contract from tort, and the only exclusion is fines and penalties under section 356.
Section 111 — the manner of proof
(1) All debts shall be proved before the trustee.
(2) Proof may be made by affidavit sworn before the Registrar, a justice or a Commissioner for Affidavits, or in any other prescribed manner or one the trustee thinks satisfactory.
(3) An estimate of the value of a debt that does not bear a certain value — because of a contingency or for any other reason — is made in accordance with the Rules of Court where applicable, and otherwise in the discretion of the trustee.
(4) and (5) A person aggrieved by the trustee’s estimate may appeal to the Court, which may (a) if it thinks the value incapable of being fairly estimated, so order — in which case the debt is not provable (s 111(6)); or (b) if it thinks the value capable of being fairly estimated, direct it to be assessed before itself or another competent court — in which case the assessed value is provable (s 111(7)).
Under section 117, on the application of a creditor or of the insolvent, or on his own motion and after the prescribed notice, the trustee may at any time expunge or reduce any proof of debt. That power has a further consequence: under section 55, if a proof is later expunged or reduced and the trustee would not have been elected without that creditor’s vote, the Court may order a fresh election.
Sections 112 to 114 — future debts, rent, and distinct contracts
112. Where proof is made for a fixed or ascertained amount that has not accrued due at the date of adjudication, the proof shall be allowed for the full amount. But for the purpose of counting the creditor’s vote, a rebate at the prescribed rate by way of discount is made, computed from the time of voting to the time the debt would have become payable.
113. Where rent or other payment falls due at stated periods and the adjudication is made between them, the person entitled may prove for a proportionate part up to the day of adjudication, as if it grew due from day to day — without affecting section 120.
114. Where the insolvent is liable on distinct contracts as a member of two or more distinct firms, or as a sole contractor and also as a member of a firm, the fact that the firms are composed wholly or partly of the same individuals, or that the sole contractor is also one of the joint contractors, does not prevent proof against the properties respectively liable.
For dividend purposes the full amount is proved; only for voting is it discounted to present value. Compare section 357 of the Companies Act, which discounts a debt payable six months or more after commencement to present value for all purposes.
Section 114 matters in partnership insolvencies, where joint and separate estates are administered alongside each other.
Section 115 — secured creditors
On giving up his security, a creditor holding a specific security on the insolvent’s property (a) may prove for his whole debt; and (b) is entitled to a dividend in respect of the balance due after realising or giving credit for the value of his security in the manner and at the time prescribed.
(2) With the consent of the committee of inspection, the trustee may, within 30 days after proof has been tendered by a secured creditor, require the creditor to give up the security on payment of the specified value.
(3) The creditor must then give it up and execute all necessary acts, transfers and assurances.
(4) A secured creditor who has proved may, at any time before he is required to give up the security, correct his valuation by making a fresh proof.
(5) A creditor who holds such a security and does not comply with this section shall be excluded from all share in any dividend.
The structure is the same as in a company liquidation under section 353: undervalue the security and the trustee may take it at that figure; fail to deal with it at all and you lose your dividend. Note the tight 30-day window for the trustee’s election, and the creditor’s right under subsection (4) to correct a valuation before being required to give up.
Remember also that a secured creditor stands outside the collective process for enforcement purposes: under section 47(2) the adjudication does not affect the power to realise or otherwise deal with the security.
Section 116 — interest
Interest computed up to the date of adjudication on a provable debt may be allowed by the trustee in the same circumstances as those in which interest would have been allowable if an action had been brought for the debt.
Interest runs to the adjudication and no further, and only where it would have been recoverable at law — under the contract, or as a judgment rate. There is no equivalent of section 359(2) of the Companies Act, which pays post-commencement interest out of any surplus.
Section 118 — mutual credit and set-off
(1) Where there have been mutual credits, mutual debts or other mutual dealings between the insolvent and a person proving or claiming to prove, (a) an account shall be taken, (b) the sums set off against each other, and the balance (and no more) claimed or paid on either side.
(2) A person is not entitled to claim the benefit of a set-off where, at the time of giving credit to the insolvent or of incurring the debt to the insolvent, he had notice of an act of insolvency committed by the insolvent and available against him for adjudication.
Set-off is automatic and mandatory where the dealings are mutual — and lost entirely where the creditor knew of an available act of insolvency when the credit was given or the debt incurred.
The corporate equivalent, section 358 of the Companies Act, works by fixed look-back periods instead: six months for an ordinary creditor and two years for a related person, in each case with an escape if the person did not have reason to suspect inability to pay. Here the test is simpler and harsher — actual notice of an act of insolvency.
Sources
- Insolvency Act (Chapter 253) — ss 47, 55, 110–118, 120
- Companies Act 1997 — ss 351, 353, 356–359
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.